MODULE XIV

NOVATION
(Arts. 1291 – 1304)

NOVATION, CONCEPT

Novation is the modification or extinguishment of an obligation by

another, either by changing the object or principal condition, substituting the
person of the debtor, or subrogating a third person in the rights of the creditor
(Art. 1291). Novation serves two functions- one is to extinguish an existing
obligation, the other to substitute a new one in its place (Star Bright Sales
Enterprises, Inc. vs Philippine Realty Corporation, et. al, G.R. No. 177936,
January 18, 2012).

Example:

D owes C P10, 000.

1. If the parties later agree that D should give instead a ring to C, there is
novation by changing the object or prestation.
2. If the parties agree that T shall take the place of D as the new debtor,
there is novation by substituting the person of the debtor.
3. If the parties later agree that X shall take the place of C as the new
creditor, there is novation by subrogating a third person in the rights of the
creditor.

REQUISITES OF NOVATION

1. There must be a previous valid obligation;

2. There must be an agreement between the parties to modify or
extinguish the obligation;
3. There must be the extinguishment of the old obligation;
4. There must be validity of the new obligation.

KINDS OF NOVATION
 1. According to origin:
A. Legal – that which takes place by operation of law; or
B. Conventional – that which takes place by agreement of the parties.
2. According to how it is constituted:
A. Express – when it is so declared in unequivocal terms; or
B. Implied – when the old and the new obligations are essentially
incompatible with each other.
3. According to extent or effect:
A. Total or extinctive – when the old obligation is completely
extinguished; or
B. Partial or modificatory – when the old obligation is merely
modified.
4. According to the subject:
A. Real or objective – when the object (or cause) or principal
conditions of the obligation are changed;
B. Personal or subjective – when the person of the debtor is
substituted and / or when a third person is subrogated in the
rights of the creditor; or
C. Mixed – when the object and / or principal conditions of the
obligation and the debtor or the creditor, or both the parties, are
changed. It is a combination of real and personal novations.

Example:

1. Real novation – S agreed to deliver to B a car. Later, they entered into

another contract whereby, instead of s delivering a car, he would
deliver ten air conditioners. The obligation to deliver the car is
extinguished by the obligation to deliver the ten air conditioners. The
change may involve the principal terms of the obligation.
2. Personal novation – If after the constitution of the obligation, both
parties agreed that C will substitute S or that D will be subrogated in
the rights of B, there is a personal novation. In this case, C becomes
the new debtor, or D, the new creditor, as the case may be.
3. Mixed novation – If the agreement of the parties is that S will deliver
to D the ten air conditioners, instead of S delivering a car to B, then
there is mixed novation because the object of the obligation and the
person of the creditor are changed.

NOVATION NOT PRESUMED

 Novation is never presumed. It must be clearly and unmistakably
established either by the express agreement of the parties or by the
incompatibility of the two obligations with each other in every material respect.

In order that the obligation may be extinguished by another which

substitutes the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point incompatible
with each other.

TEST OF INCOMPATIBILITY BETWEEN TWO OBLIGATIONS OR

CONTRACTS

The test is whether they can stand together, each one having an
independent existence. If they cannot, they are incompatible, and the
subsequent obligation novates the first. Upon such novation, the former
obligation losses all its force and effect and only the new obligation can be
enforced.

Example:

1. S agreed to deliver to B a car on November 10. Subsequently, a

second agreement was entered into whereby S would deliver a tuck on
November 10. Is there novation?

There is no novation because it is not so declared expressly by the

parties in their second agreement, and the two obligations are not
incompatible with each other because each can stand separately.

2. Suppose the obligation of S is to construct a house on a certain parcel

of land. S agreed to construct an apartment on the same parcel of
land. The area of the land is such that both the house and the
apartment as per building plans cannot be constructed on the same
site.

There is novation in this case even in the absence of an express

agreement to that effect because the obligations are absolutely
incompatible with each other.

KINDS OF PERSONAL NOVATION

 1. Substitution – when the person of the debtor is substituted; or
2. Subrogation – when a third person is subrogated in the rights of the
creditor.

KINDS OF SUBSTITUTION

1. Expromision - Here, a third person initiates the substitution and

assumes the obligation even without the knowledge or against the will
of the debtor. It requires the consent of the third person and the
creditor. It is essential that the old debtor be released from his
obligation; otherwise, there is no expromision.

Example:

T (third person) approaches C (creditor) and tells him that he will

pay the debt of D (debtor). C agrees. There is no expromision in this
case, unless there is an agreement that D shall be released from his
obligation to C.

2. Delegacion – that which takes place when the creditor accepts a third
person to take place of the debtor at the instance of the latter. The
creditor may withhold approval. In delegacion, all the parties, the old
debtor, the new debtor, and the creditor must agree.

Example:

D (debtor) tells C (creditor) that T will pay D’s debt. C agrees. It

does not necessarily mean that there is delegacion here. But if D tells
C that T will pay his debt and he asks C to release him from his
obligation, to which C agrees, delegacion results.

RIGHTS OF NEW DEBTOR WHO PAYS

1. In expromision, payment by the new debtor gives him the right to

beneficial reimbursement (See Art. 1236, Par. 2).
2. If the payment was made with the consent of the original debtor or on
his own initiative (delegacion), the new debtor is entitled to
reimbursement and subrogation (See Art. 1237).
EFFECT OF NEW DEBTOR’S INSOLVENCY OR NON-FULFILLMENT OF THE
OBLIGTAION IN EXPROMISION

If the substitution is without the knowledge or against the will of the

debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not
give rise to any liability on the part of the original debtor (Art. 1294).

Remember that in expromision, the replacement of the old debtor is not

made at his own initiative.

EFFECT OF NEW DEBTOR’S INSOLVENCY OR NON-FULFILLMENT OF THE

OBLIGATION IN DELEGACION

General Rule: The old debtor is not liable to the creditor in case of the
insolvency of the new debtor.

Exceptions:

1. The said insolvency was already existing and of public knowledge

(although it was not known to the old debtor) at the time of the
delegacion; or
2. The insolvency was already existing and known to the debtor
(although it was not of public knowledge) at the time of the
delegacion.

The exceptions are intended to prevent fraud on the part of the old
debtor. On the other hand, if the non-fulfillment of the obligation is due to
other causes, the old debtor is not liable.

Example:

D owes C P1,000. D proposed to C that T would substitute him as

a debtor. C agreed to the proposal.

If, at the time of the delegacion, T was already insolvent but his
insolvency was neither of public knowledge nor known to D, then D is
not liable. Neither is D liable if the insolvency of T took place after he
delegated his debt.

D is also not liable if C had knowledge that T was insolvent at the

time the debt was delegated to him.
KINDS OF SUBROGATION

1. Conventional Subrogation – when it takes place by express agreement

of the original parties (the debtor and the original creditor) and the
third person (the new creditor).
2. Legal Subrogation – Subrogation by operation of Law. It is presumed
that there is legal subrogation in the following cases:

A. When a creditor pays another creditor who is preferred, even

without the debtor’s knowledge;

Example:

D owes C P50, 000. The debt is secured by a real mortgage.

D also owes X P40, 000 which is unsecured. If X pay D’s debt to C
amounting to P50, 000, X is subrogated in the rights of C. Hence, if
D cannot pay the debt of P50, 000, X can foreclose the mortgage.

B. When a third person, not interested in the obligation, pays with the
express or tacit approval of the debtor;

Example:
D owes C P100, 000. The debt is secured by a mortgage on
D’s lot. If T pays C with D’s consent, T is subrogated in the rights
of C. Thus, T can collect the amount he had paid from D, and if D
cannot pay, T can foreclose the mortgage on the lot.

C. When, even without the knowledge of the debtor, a person

interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latter’s share.

Example:

D owes C P10, 000 with G as guarantor. If G pays C, G is

subrogated in the rights of C. However, G’s guaranty is
extinguished because the qualities of debtor and creditor are
merged in his person.
 EFFECT OF NOVATION ON ACCESSORY OBLIGATION (Art. 1296)

General Rule: When the principal obligation is extinguished in

consequence of a novation, accessory obligation shall also be extinguished,
except in the following cases:

Exceptions:

1. When the accessory obligation was established for the benefit of third
persons who did not give their consent.

Example:
D borrowed P50, 000 from C. The obligation is secured by a chattel
mortgage on D’s car and bears interest at 10% per annum which the
parties stipulated would be paid by D to T, a student whom C is sending
to school. Subsequently, D and C agreed that D would give C a diamond
ring instead of money. The novation here extinguishes the accessory
contract of chattel mortgage. However, the accessory obligation to pay
interest to T will subsist unless T gave his consent to the novation.

2. When there was a stipulation that the accessory obligation will

subsist notwithstanding the novation.

3. When the novation is one where a third person is subrogated in the

rights of the creditor.

EFFECT IF NEW OBLIGATION IS VOID

If the new obligation is void, the original one shall subsist, unless the
parties intended that the former relation should be extinguished in any event
(Art. 1297).

EFFECT IF NEW OBLIGATION IS VOIDABLE

If the new obligation is voidable, novation can take place. But the
moment it is annulled, the novation must be considered as not having taken
place, and the original one can be enforced, unless the intention of the parties
is otherwise.

EFFECT IF ORIGINAL (OLD) OBLIGATION IS VOID

If the original obligation is void, the novation is also void. This is because
if the original obligation is void, there is no obligation to extinguish since it is
non-existent.

Example:

S agreed to deliver prohibited drugs to B. later on, it was agreed that S

would pay B P100,000 instead of delivering the drugs.

The novation is void because the original obligation is void.

EFFECT IF ORIGINAL (OLD) OBLIGATION IS VOIDABLE

The novation is valid provided that annulment may be claimed only by

the debtor or when ratification validates acts which are voidable (Art.1298). The
novation here cures whatever defects present in the original obligation.

Example:

D executed a promissory note for P50, 000 representing the price of a car
which C, by means of violence, forced D to buy. Later, when the violence has
ceased, D proposed to C that he would give his ring instead of P50,000. C
accepted the proposal. The novation here is valid. Whatever defect in the
consent present in the original one is deemed cured by the new obligation to
give the ring.

EFFECT IF ORIGINAL OBLIGATION IS SUBJECT TO A SUSPENSIVE OR

RESOLUTORY CONDITION

The new obligation shall be subject to the same condition unless

otherwise stipulated by the parties (Art. 1299).

Example:

D promised to give C a specific ring if C finishes his degree in

Accountancy with honors. Later, the parties agreed that D would give C a
specific bracelet instead of a specific ring. Here, the obligation to give a specific
bracelet is subject to the same condition that C must finish his Accountancy
degree with honors, unless they stipulated otherwise.

EFFECT OF PARTIAL SUBROGATION

A creditor, to whom partial payment has been made, may exercise his
right for the remainder, and he shall be preferred to the person who has been
subrogated in his place in virtue of the partial payment of the same credit (Art.
1304).

Example:

D owes C P100, 000. With the consent of both, T, a third person pays C
P50,000. Thus, C and T are now creditors of D at P50,000 each. If D has only
P50, 000.00, C will be preferred over T.

NOVATION IN SOLIDARY OBLIGATION

A is indebted to X, Y and Z, solidary creditors, in the amount of P30,

000. Thereafter, X, without the knowledge of Y and Z agreed with A that
instead of A paying P30, 000, A would instead give a specific ring to the
creditors. The obligation of A to give P30, 000 is extinguished by the obligation
to give a specific ring. However, X has to give Y and Z their respective shares at
P10, 000 each because novation executed by any of the solidary creditors shall
render him liable to the others for the share in the obligation corresponding to
them (See. Art.1215).